Mortgages for Self-Employed with Bad Credit

Mortgage for Self Employed with Bad Credit: A Comprehensive Guide

Mortgages for self employed with bad credit can feel daunting but it’s far from impossible. Traditional high street lenders often apply strict criteria, relying on automated credit scoring and inflexible income assessments, which can disadvantage self-employed applicants with credit blips.

Many mainstream lenders use automated processes and may reject self-employed applications due to perceived risk. However, the market has evolved, and specialist mortgage lenders now offer more accommodating options. A specialist adverse credit lender can play a crucial role in navigating the challenges posed by poor credit history to secure a favorable deal for applicants.

These lenders understand the nuances of self-employment and are willing to take a deeper look at your individual circumstances. This includes how your business performs, how your income is structured, and the context around your credit issues.

Most lenders require proof of income to assess mortgage applications. Self-employed individuals are often viewed as higher-risk applicants by lenders, but whether you’ve had missed payments, defaults, CCJs, or even a Debt Management Plan, there are lenders who will work with you. Saving a large deposit can significantly improve your mortgage options by enhancing your profile and opening up access to a wider range of deals.

You would need to provide proof your income is stable and the issues are historic or well-managed. The key is to present a strong, well-documented application with support from an experienced mortgage broker who understands both the self-employed and adverse credit market.

Introduction to Mortgage Options

What Is Considered Bad Credit?

Bad credit refers to a history of financial difficulties reflected on your credit file. This can include:

• Missed or late payments
• Defaults
• County Court Judgements (CCJs)
• Debt Management Plans (DMPs)
• Individual Voluntary Arrangements (IVAs)
• Bankruptcy
• High levels of unsecured debt

A poor credit rating can limit mortgage options and increase interest rates.

Lenders will assess the severity, frequency, and how recently these issues occurred. Not all credit issues are treated the same. Some lenders may overlook an old default, but a recent CCJ could raise red flags.

The severity and age of bad credit issues significantly impact a lender’s decision on whether to approve a mortgage application. Additionally, lenders consider unexpected life events as more forgivable than gross financial mismanagement when assessing bad credit.

Challenges for Self-Employed Borrowers with Bad Credit

When self employed people apply for a mortgage with bad credit, lenders take a detailed and case-by-case approach to assess your risk level and overall affordability. They don’t just look at your credit score, they also carefully review your credit profile. This includes the types of credit issues you’ve had, how recent they are, and how severe they appear. Here’s a breakdown of how lenders evaluate bad credit when assessing a mortgage application:

1. Type of Credit Issue

Lenders differentiate between minor and serious credit problems, including those stemming from a bad credit history:

• Minor issues like missed payments on credit cards or mobile bills may be more acceptable, especially if they are over 12 months old.
• More serious issues such as defaults, County Court Judgments (CCJs), Individual Voluntary Arrangements (IVAs), or bankruptcies require closer scrutiny. Some high street lenders will decline outright, while specialist lenders may still consider your application. This depends on how long ago the event occurred and whether it’s been satisfied.

2. Recency and Frequency

• A recent missed payment (within the last 6–12 months) may raise red flags, especially if there’s a pattern. Recent credit issues can lead to a poor credit score, which may affect mortgage approval.
• Lenders are more lenient when the issues are older generally. Credit issues over 2–3 years ago carry less weight, particularly if your finances have been stable since.

3. Resolution and Current Status

• If a default or CCJ has been satisfied, and you have documentation to prove it, lenders are more likely to be open to lending.
• Setting up direct debits for regular payments can help manage ongoing financial commitments and improve creditworthiness.
• If you’re still in an active Debt Management Plan (DMP) or have unsatisfied defaults, this may reduce the number of available lenders. There are still specialist lenders who may consider your case, especially if the plan has been running successfully for a year or more.

4. Amount of Debt and Credit Utilisation

• Lenders check your current outstanding debt, how much of your credit limits you’re using (credit utilisation) and whether you’re staying within agreed terms.
• Staying within credit card limits is crucial for maintaining a good credit utilization ratio.
• High credit utilisation (e.g. using over 90% of your credit limits) may be a red flag unless there’s a good reason and your payments are up to date.

5. Affordability and Stability

Regardless of bad credit, lenders want to see:

• Stable and steady income whether employed, self-employed, or contract-based
• Consistent expenditure that leaves a buffer each month
• Evidence that your financial behaviour has improved

6. Supporting Evidence and Explanation

• A well-written adverse credit explanation can help. Lenders want to know why the credit problems happened (e.g., illness, redundancy, divorce) and what’s changed since.
• Supporting documents such as bank statements, credit reports, and proof of satisfied debts will strengthen your case.
• Providing documentation for upcoming contracts can also strengthen your mortgage application by demonstrating future income stability.

What Lenders Look For?

When assessing mortgage applications from self-employed borrowers with bad credit, lenders typically evaluate how stable the applicant’s income has been over time. Most lender criteria for self-employed applicants involve assessing how their income is stable over time. Lenders view self-employed incomes as unpredictable, affecting their willingness to lend.

Additionally, lenders assess how much you can borrow based on an income multiple of your annual income. Mortgage lenders typically use an income multiple, often between 4 and 4.5 times your annual income, to calculate potential borrowing amounts. They assess self-employed income based on net profit averaged over the past two to three years.

Self-employed applicants’ earnings may also be assessed differently depending on their trading structure, such as whether they operate as a sole trader or a limited company. The better a self-employed applicant’s credit score, the more mortgage options will be available to them.

When it comes to self-employed mortgages with bad credit, specialist lenders tend to take a more flexible and pragmatic approach, especially for company directors of limited companies. While many high street lenders will only consider income based on salary and dividends. Some specialist lenders are happy to assess affordability using retained profits plus salary.

Providing proof of dividend payments is crucial for company directors, as it demonstrates income stability and qualifying credentials.

This would be the case if the applicant chooses to keep money in the business rather than draw it. This is especially helpful for directors who take a modest income for tax efficiency but have strong, profitable businesses.

Lenders like Aldermore, Kensington, Foundation Home Loans, and Bluestone may consider this approach, depending on the overall strength of the application. Ultimately, this is at the discretion of the underwriter, who will review the full set of company accounts and business performance to make a manual, case-by-case decision.

What Lenders Look for in Self-Employed Applicants with Bad Credit

The Mortgage Application Process

1. Assess Your Financial Situation

• Review your credit report from agencies like Experian, Equifax, or Checkmyfile.
• Checking your credit score before applying for a mortgage is advisable.
• Resolve any outstanding credit issues, such as unpaid defaults or CCJs, where possible.
• Save for a larger deposit (10-25% is often required).

2. Organise Financial Documents

• Gather at least two years of certified accounts. Many lenders prefer self-employed applicants to have at least two to three years of accounts.
• Obtain SA302 forms and tax year overviews from HMRC.
• Prepare bank statements to demonstrate financial stability.
• Applicants will need to submit personal identification and proof of address along with income documentation.
• Include documentation of the business income, such as profit and loss statements to strengthen the application.

3. Consult a Specialist Mortgage Broker

• A broker specialising in bad credit or self-employed mortgages can help identify suitable lenders and improve your chances of approval. Using a mortgage broker can save self-employed individuals time and prevent unnecessary damage to their credit score from multiple applications.
• Most specialist lenders are not available directly to borrowers and typically work with mortgage brokers. Specialist mortgage providers often work with brokers to offer tailored mortgage solutions for self-employed individuals with bad credit.

4. Identify Suitable Lenders

• Many high street banks may decline applications from self-employed individuals with bad credit, so exploring specialist mortgage lenders is crucial.
• If you’re self-employed with only one year of self employment history and have bad credit, several specialist mortgage lenders may consider your application. These lenders are typically more flexible when it comes to both bad credit and self-employed applicants. Here are some specialist lenders that may offer mortgages under these conditions:

  1. Lender	Minimum Trading Period	Bad Credit Considered	Typical LTV	Notes
     Kensington	1 year	Yes – CCJs, defaults, DMPs	Up to 85%	Accepts one-year accounts
     Pepper Money	1-2 years	Yes – recent issues considered	Up to 85%	Tiered credit bands
     The Mortgage Lender	1 year	Yes – flexible criteria	Up to 85%	Accepts DMPs and CCJs
     Foundation Home Loans	2 years	Yes – some past bankruptcy	Up to 80%	Must have been discharged at least 3 years ago
     Vida Homeloans	1-2 years	Yes – with clean recent conduct	Up to 85%	Allows satisfied CCJs and defaults
     Aldermore	1 year	Yes – with strong affordability	Up to 85%	Manual underwriting
     Bluestone Mortgages	1 year	Yes – most adverse credit	Up to 85%	Good for complex self-employed income

  It’s important to consult with a specialist mortgage broker who can help you navigate these options and find the right lender based on your individual circumstances. They’ll be able to guide you through the process and identify lenders who are more likely to approve your application.

5. Submit Your Application

• Provide all requested documents and be prepared to explain the reasons for your bad credit.
• Lenders may require additional information or guarantees, such as a higher deposit or a guarantor.

6. Property Valuation and Approval

• The lender will conduct a property valuation to ensure it meets their criteria.

• The lender will also assess your ability to meet mortgage repayments based on your financial stability.

• Once approved, you’ll receive your mortgage offer.

Best Practices to Strengthen Your Application

If you’re self-employed with bad credit, there are still plenty of things you can do to improve your chances:

1. Work with a Specialist Mortgage Broker: Brokers like us understand lender criteria and match your situation with the right lender. Having the right support can make all the difference between acceptance and rejection.
2. Provide Full Documentation: Include SA302s, tax overviews, business accounts, and bank statements. The more transparent you are, the better.
3. Reduce Existing Debt: Lower your credit card balances and any other commitments to improve affordability.
4. Check Your Credit Report: Use CheckMyFile, Experian, Equifax, or TransUnion to identify and correct any errors.
5. Consider a Joint Application: If your partner has a better credit history, it may strengthen the application.
6. Save for a Bigger Deposit:The more you can put down, the less risk for the lender.

Conclusion

While obtaining a mortgage as a self-employed person with bad credit can be more complex, it’s achievable with the right preparation and guidance. Specialist lenders and brokers play a key role in helping you navigate the process, ensuring you secure a deal tailored to your circumstances.

By following this guide and working with experts, you can turn your property ownership goals into reality.

Get help from an experienced mortgage broker

You can speak to one of our specialist mortgage brokers who would be able to guide you through the process. They will advise if there is a lender available and the maximum loan amount based on your circumstances. We are a whole of market mortgage brokerage with access to all lenders. Call us on 01332 470400 or complete the form with your details for us to give you a call back.

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